Multiple Choice; Comprehensive Problem on Relevant Costs The following are the Class Company’s unit costs of making and selling a given item at a level of 20,000 units per month:

Manufacturing:

Direct materials $1.00 Direct labor 1.20 Variable indirect cost .80 Fixed indirect cost .50 Selling and other:

Variable 1.50 Fixed .90 The following situations refer only to the data given above—there is no connection between the situations. Unless stated otherwise, assume a regular selling price of $6 per unit.

Choose the answer corresponding to the most nearly acceptable or correct answer in each of the nine items. Support each answer with summarized computations.

1. In presenting an inventory of 10,000 items on the balance sheet, the unit cost conventionally to be used is

(a) $3.00,

(b) $3.50,

(c) $5.00,

(d) $5.90,

(e) $2.20.

2. The unit cost relevant to setting a normal price for this product, assuming that the implied level of operations is to be maintained, is

(a) $5.00, (b)

$4.50,

(c) $3.50,

(d) $3.00,

(e) $5.90.

3. This product is usually sold at the rate of 240,000 units per year (an average of 20,000 per month). At a sales price of $6.00 per unit, this yields total sales of $1,440,000, total costs of $1,416,000, and a net margin of $24,000, or 10¢ per unit. It is estimated by market research that volume could be increased by 10 percent if prices were cut to $5.80. Assuming the implied cost behavior patterns to be correct, this action, if taken, would:

a. Decrease profits by a net of $7,200.

b. Decrease profits by 20¢ per unit, $48,000, but increase profits by 10 percent of sales, $144,000; net, $86,000 increase.

c. Decrease unit fixed costs by 10 percent or 14¢ per unit and thus decrease profits by 20¢ — 14¢, or 6¢ per unit.

d. Increase sales volume to 264,000 units, which at the $5.80 price would give total sales of $1,531,200; costs of $5.90 per unit for 264,000 units would be $1,557,600, and a loss of $26,400 would result.

e. None of these.
A cost contract with the government (for 5,000 units of product) calls for the reimbursement of all costs of production plus a fixed fee of $1,000. This production is part of the regular 20,000 units of production per month. ‘bhe delivery of these 5,000 units of product increases profits from what they would have been, were these units not sold, by

(a) $1,000,

(b) $2,500 (c)
$3,500,

(d) $300,

(e) none of these.
. Assume the same data as in 4 above, except that the 5,000 units will displace 5,000 other units from production. The latter 5,000 units would have been sold through regular channels for $30,000 had they been made. The delivery to the government increases (or decreases) net profits from what they would have been, were the other 5,000 units sold by

(a) $4,000 decrease,

(b) $3,000 increase,

(c) $6,500 decrease,

(d) $500 increase, (€) none of these.
. The company desires to enter a foreign market, in which price competition is keen. An order for 10,000 units of this product is being sought on a minimum unit-price basis. It is expected that shipping costs for this order will amount to only 75¢ per unit but the fixed costs of obtaining the contract will be $4,000. Domestic business will be unaffected. The minimum basis for breakeven price is

(a) $3.50,

(b) $4.15,

(c) $4.25,

(d) $5.00,

(e) $3.00.
. The company has an inventory of 1,000 units of this item left over from last year’s model. These must be sold through regular channels at reduced prices. The inventory will be valueless unless sold this way. The unit cost that is relevant for establishing the minimum selling price would be (a)
$4.50,

(b) $4.00,

(c) $3.00,

(d) $1.50,

(e) $5.90.
. A proposal is received from an outside supplier who will make and ship this item directly to the Class Company’s customers as sales orders are forwarded from Class’s sales staff. Class’s fixed selling costs will be unaffected, but its variable selling costs will be slashed 20 percent. Class’s plant will be idle, but its fixed factory overhead would continue at 50 percent of present levels. To compare with the quotation received from the supplier, the company should use a unit cost of

(a) $4.75,

(b) $3.95, (c)
$2.95,

(d) $5.35,

(e) none of these.
. Assume the same facts as in 8 above, except that if the supplier’s offer is accepted, the present plant facilities will be used to make a product whose unit costs will be:
Variable manufacturing costs $5.00 Fixed manufacturing costs 1.00 Variable selling costs 2.00 Fixed selling costs (new increment) .50 Total fixed factory overhead will be unchanged, while fixed selling costs will increase as indicated. The new product will sell for $9. This minimum desired net profit on the two products taken together is $50,000 per year.
What is the maximum purchase cost per unit that the Class Company should be willing to pay for subcontracting the old production?